DUBAI, United Arab Emirates (AFP) —Hard hit by a drop in oil income, energy- rich Gulf states will next year introduce value added tax (VAT) to a region long known for being tax-free.

Some have hailed introducing VAT as the start of “exciting, dramatic” change in the region, but the measure is also expected to push prices up for all residents, including citizens and low-income workers.

On Sunday, the United Arab Emirates (UAE) doubled the price of tobacco and increased soft drink prices by 50 per cent, ahead of the more general VAT on goods and services from January 1.

The UAE is one of the six Gulf Cooperation Council (GCC) states to have agreed to introduce VAT at five per cent next year, as they seek to revitalise their economies.

The UAE and Saudi Arabia have said they will implement VAT from January 1, 2018, while the other GCC states of Bahrain, Kuwait, Oman and Qatar are expected to follow suit during the year.

Economies in the Gulf — home to the world's biggest exporters of oil and liquefied natural gas — took a major hit after a global supply glut triggered a drop in prices in 2014.

Their balance sheets have remained in the red despite government austerity measures recommended by the International Monetary Fund, including freezing wages, benefits and State-funded projects, cutting subsidies and raising power and fuel prices.

Governments across the region have also drawn hundreds of billions of US dollars from their massive sovereign wealth resources in an attempt to curb the deficit.

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The six states are now taking austerity measures a step further with the plan to introduce VAT, ending their decades- old reputation for being tax havens.

Accounting and consultancy firm Deloitte has said the progressive implementation of VAT from next year “marks the start of some of the most exciting, dramatic and far-reaching socio- economic changes in the region since the discovery of oil” more than half a century ago.

But the move is expected to increase prices across the board including for nationals, who make up roughly half of the GCC's overall population of 50 million.

Gulf nationals have for decades benefited from a generous cradle-to-grave welfare system, and have largely been spared by austerity measures so far.